Commercial Insurance Services

The Pros and Cons of Employee Leasing

: : Louis Santelli, CPCU, CIC, Managing Director, Commercial Insurance Services
631.923.1595 ext. 330
G.R. Reid Insurance Services, LLC

Employee leasing firms earned $68 billion in gross revenues in 2008, according to the National Association of Professional Employer Organizations. Their clients, primarily small businesses with fewer than 20 employees, outsource to leasing firms the responsibilities for payroll administration, employee benefits, workers' compensation claim management, human resource management, and related operations. Businesses trying to reduce costs and focus on growth may find employee leasing to be an attractive option. It is an option, however, that comes with advantages and disadvantages for both employer and employee.

The NAPEO cites a number of benefits from employee leasing. The benefits for employers include:

• Access to professionals with expertise in human resources, payroll, risk management, and employee benefits.
• Assistance with labor law compliance.
• Professional claim management.
• Reduced and controlled administrative costs.
• Professionally written employee handbooks, policies, and procedures.
• Relief from some employment-related liabilities.
• Reduced workers' compensation costs resulting from improved workplace safety.

Employees may also benefit from leasing in several ways.

• Access to benefits that might not have otherwise been available, such as 401(k) plans, cafeteria plans, insurance, and credit union membership.
• Timely and accurate paychecks.
• Protection under federal labor laws.
• Improved communication among and between employees.
• Employees who move from one leasing client to another do not lose eligibility for benefits.
• Efficient and timely claim processing.
• Assistance with employment-related issues.

Employee leasing carries some risks. A poorly managed leasing firm may mishandle payroll and benefits or may go out of business, leaving the client with its obligations. The employer may also be legally liable for the actions or inactions of the leasing firm. For example, if the leasing firm fails to comply with regulations, it may be the employer who bears ultimate responsibility. Also, the employer is ceding control of its workforce to a third party who may or may not do things the way the employer would. Employee relations may suffer during the transition to leasing.
From the employee's standpoint, the employer will have to fire and the leasing firm will have to re-hire him. Also, there is no guarantee that the leasing firm's benefits will be as good as those the employer offered. Some employers have also used leasing as a means to avoid dealing with unions, though federal rules may limit their ability to do this.

Employers who decide to lease their employees should carefully evaluate the leasing firms it considers. The financial stability of the firm and of the insurance companies providing its benefits are a major consideration, as the failure of either may leave the employer with unfunded obligations. The firm's experience in the employer's industry, track record of success, and safety record are also important. Another consideration is the range of benefits the firm offers; a plan that does not meet the employer's needs will not be worth the expense of hiring the leasing firm.

Employee leasing is a big step and not one to be taken lightly. Employers must weigh the upsides and downsides of leasing and make decisions that is best for their employees and their businesses.

Human Resource Services News

W2 Reporting Requirements

:: Deidre Siegel
Director, Human Resource Services
G. R. Reid Consulting Services, LLC
Read about G.R. Reid Human Resource Management Tools


The W2 reporting requirements for large employers will change for the 2012-year, filed in 2013. Employers with more than 250 employees will be required to report the cost of group health care coverage provided to employees. Employers with less than 250 employees will be required to report health care coverage costs in the 2013-year, filed in 2014.  In addition to the small employer exception for 2012, the following additional exceptions will be in effect:

• An employer that contributes to a multi-employer plan is not required to report any coverage costs for such plan
• Indian tribal governments are not required to report
• A self-insured church plan that is exempt from federal health continuation requirements is also not required to report the amount of coverage on the W-2
• The cost of coverage provided by a government entity for the benefit of military members and their families is not subject to reporting.  

If a large employer is not exempt from filing based on the aforementioned exceptions, the system requirements should immediately be examined to ensure compliance. If an employer does not comply, a penalty of $200 per return to a maximum of $3 million per year will be imposed.

Employers are required to report the costs for the covered employee plus the employer cost for any covered dependent and the amount paid by the employee on a pre-tax or after-tax basis. This includes FSA as well if the employee’s health FSA for the plan year exceeds the salary reduction election for the plan year when an employer contributes to the FSA Plan. For example, if an employee elects to contribute $700 to the FSA Plan and the employer matches it, then the employer contribution of $700 must be reported.

The IRS notice also indicates that if the employer charges the same rate to all employees regardless of the scope of coverage, it can report that same cost for all employees. If the employer charges rates based on a coverage tier, the employer can report the same cost for each coverage tier.

In addition, if a former employee has continued coverage for the year under COBRA, this should also be reported on the W2. The IRS Notice states that the cost of coverage must be determined on a calendar year, therefore some COBRA rates will need to be converted to a calendar year amount for purposes of reporting the costs. If a former employee requests a W2 prior to the end of the calendar year, the employer is not required to include the cost of the coverage on the midyear W2.

Lastly, if dental and vision plans are separate coverages and not included within the health plan, these do not need to be reported on the W2. The reporting is solely for health plan coverage and FSA plans when applicable.

The aggregate employer cost is reported in Box 12, using code DD. This reporting is for information only and does not make such amounts taxable.

For further information on the W2 reporting notice, you may visit http://apps.irs.gov/pub/irs-drop/n-11-28.pdf